Chile, September 27, 2019 – Delta Air Lines, Inc. (Baa3 stable) and LATAM Airlines Group S.A. (LATAM, Ba3 stable) announced that they had entered a strategic partnership in which Delta will acquire 20% of LATAM’s shares for $1.9 billion through a secondary public tender offer for $16 per share. The partnership also includes Delta investing $350 million in LATAM to support the creation of the partnership. Additionally, Delta will purchase four Airbus A350-900 aircraft that LATAM operates and assume LATAM’s purchase commitments for 10 A350s scheduled for delivery between 2020 and 2025. Delta will be represented on LATAM’s board of directors as one of the company’s largest shareholders.
We view the announced partnership as credit positive for LATAM because it will create a complementary route connecting the Americas that, according to the airlines, will be the strongest airline route network between North and South America. The partnership will also provide strategic, operational and financial benefits for LATAM.
The $350 million investment will not increase LATAM’s liquidity because it will largely be used to create the partnership. But the acquisition of the four A350-900 aircraft and the assumption of the commitments for the 10 A350s scheduled for delivery will improve LATAM’s free cash flow generation and reduce its forecasted debt by over $2 billion by 2025, which is around 20% of the company’s gross indebtedness that totaled $10.6 billion at the end of June 2019. There will be no immediate effect on the company’s credit metrics because the commitments are scheduled to be delivered between 2020 and 2025.
LATAM will withdraw from the oneworld global airline alliance. Presumably, a large portion of the $350 million investment in the partnership will fund LATAM’s oneworld exit. American Airlines, Inc. (Ba3 stable), a oneworld member, in a 26 September press release, noted that the Chilean Supreme Court had ruled against an application for American and LATAM’s to form a joint business arrangement, which influenced the decision for American and LATAM to part ways.
Delta’s $1.9 billion purchase price for the equity stake values LATAM’s equity at $9.5 billion, which compares with a pre-announcement market cap of about $5.5 billion, or a per share price of about $9.00. The tender offer will be at $16.00 per share, an almost 80% premium to LATAM’s average share price over the past 30 days.
Delta and LATAM’s transactions are subject to regulatory approvals, and regulatory risk remains given the Chilean Supreme Court’s ruling against the proposed joint business arrangement between American and LATAM. However, in the case of Delta and LATAM, there is minimal overlap today between the airlines’ capacity, which was not the case with LATAM and American.
LATAM is a Chile-based airline holding company formed by the business combination of LAN Airlines S.A. of Chile and TAM S.A. of Brazil in June 2012. LATAM is the largest airline group in South America, with a local presence for domestic passenger services in Brazil, Chile, Peru, Ecuador, Argentina and Colombia. The company also provides intra-regional and international passenger services, and has a cargo operation using the belly space on passenger flights and dedicated freighter service. For the 12 months that ended June 2019, LATAM generated $9.75 billion in net revenue and carried 71.1 million passengers and 900,000 tons of cargo.
With an industry-leading global network, Delta and the Delta Connection carriers offer service to more than 300 destinations in more than 50 countries on six continents. Headquartered in Atlanta, Delta had over 88,000 full-time equivalent employees and operated a fleet of more than 1,200 aircraft in 2018. The company reported $44.4 billion of revenue in 2018.
Credit Outlook: 30 September. Pg. 4
Moodys
Atlantic Investors Service 